Asia n Insights SparX Hong Kong Property & Retail Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 17 July 2018 Bridge of tourists HSI: 28.316 New mega infrastructure creates better links with China ANALYST Jeff YAU CFA, +852 2820 4912; Higher tourist visitation a boost to retail & hotel sectors [email protected] Top picks: Wharf REIC (1997), Luk Fook (590) & Sa Sa (178) Mavis HUI +852 2863 8879; [email protected] New mega infrastructure creates better links with China. The Ian CHUI +852 2971 1915; soon-to-be-commissioned Express Rail Link (XRL) & HK-Zhuhai-Macau [email protected] Bridge (HZMB) will result in better transportation connectivity Jason LAM +852 29711773 between HK & Mainland China. We estimate XRL could bring in 3m [email protected] additional Mainland tourists p.a. from 2019, lifting tourist arrival numbers by a decent 7% CAGR for 2017-20. But we should not Top picks underestimate HZMB’s medium-term potential after the Tuen Mun- Closing 12-m Chek Lap Kok Link & SKYCITY come onstream by 2020. In the longer T ick er Mk t Cap Price tgt Px Recom run, prosperity of the Greater Bay Area could raise mobility within the HK$bn (HKD) (HKD) region and increase its GDP (+9% CAGR to US$4.6tn by 2030) and Hong Kong Property spending power, hence further supporting the positive prospects. Far East Consortium 35 HK 10 4.52 5.53 BUY Hysan Development 14 HK 44 42.4 51.15 BUY Increased tourist visitation: a boost to retail and hotel sectors. Langham Hospitality 1270 HK 7 3.17 3.68 BUY Riding on flourishing inbound tourism, the HK retail and hotel Regal REIT 1881 HK 7 2.3 2.61 BUY sectors should run on a multi-year uptrend. Better retail sales could Wharf REIC 1997 HK 171 56.45 65.4 BUY beef up turnover rents and strengthen retail reversionary growth. Hotels should also be able to raise room rates further, pushing up Consumer the Revenue per available room (RevPAR) by 8-10% a year during Chow Sang Sang 116 HK 10.18 14.82 20.65 BUY 2018-19, in our view. Chow Tai Fook 1929 HK 85.60 8.34 n.a. NR Lifestyle 1212 HK 26.60 16.70 18.72 BUY Stock recommendations. Major HK-based retailers like Chow Tai Luk Fook 509 HK 18.99 31.65 40.75 BUY Fook, Luk Fook, Chow Sang Sang and Sa Sa, and department store Sa Sa 178 HK 14.59 4.53 6.51 BUY operator Lifestyle will outperform their peers to capture sound sales Source: DBS Bank (Hong Kong) Limited (“DBS HK”) growth. They should benefit even more from better operating Note: Prices used as of 6 July 2018 leverage ahead, given at least c.50% of their HK/Macau revenue comes from PRC tourist consumption. With a strong retail footprint in Tsim Sha Tsui & Causeway Bay, Wharf REIC & Hysan Development also stand to benefit from the booming retail market. In the hotel sector, Langham Hospitality Investments and Regal REIT are our preferred pure Hong Kong plays. Far East Consortium also offers investors a good exposure to the three-to-four-star hotel market. ASIAN INSIGHTS ed- JS / sa- CS/CW Asian Insights SparX Hong Kong Property & Retail Sector The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents Investment summary 3 New infrastructure to link Hong Kong and China 4 Inbound tourism – from strength to strength 10 Retail market recovery gaining momentum 11 Hotel boom underway 16 Retailers 19 Retail landlords 20 Hotel plays 21 Appendix 22 HK retail sales 22 PRC tourist data 24 Greater Bay Area 25 Stock Profiles 34 Far East Consortium 34 Hysan Development 34 Langham Hospitality Investments 34 Regal REIT 34 Wharf REIT 34 Chow Sang Sang 34 Chow Tai Fook 34 Lifestyle International 34 Luk Fook Holdings 34 Sa Sa 34 Note: Prices used as of 6 July 2018 ASIAN INSIGHTS Page 2 Asian Insights SparX Hong Kong Property & Retail Sector Investment summary Forthcoming mega infrastructure projects to link up Hong Since Hong Kong’s hotel and retail industry are highly Kong with Mainland China. With the forthcoming dependent on Mainland tourists, improving the accessibility of commissioning of the Express Rail Link (XRL) and Hong Kong- Mainland tourists into Hong Kong via XRL and HZMB should Zhuhai-Macau Bridge (HZMB), Hong Kong will become better give the recovering retail and hotel sectors an additional push. connected with Mainland China than ever before, thus linking Hong Kong to a brighter future. Top brand retailers selling luxuries and cosmetics to also take the lead. In view of at least 20-30% higher price points in Express Rail Link shortens travelling time, pointing to better Mainland China mainly attributable to taxes, PRC tourists save connectivity. Targeted for commissioning in the third quarter of more when buying premium global brands and jewelleries & 2018, the 26-kilometre XRL will link up Hong Kong with watches in HK/Macau that are within close proximity. Shenzhen, Guangzhou, and the high-speed railway network in Cosmetics have also been their favourite merchandises Mainland China. The travelling time between Hong Kong and considering their affordable average ticket sizes to suit major cities in China will be considerably shorter. everyone. Hence, these categories will benefit the most along with a rising number of Mainland visitors, as already seen in Better than air travel for those within six hour travelling radius their strong contribution of c.50% or higher HK/Macau sales in by train. The benefits of using the XRL diminishes for Mainland these segments. To best play on the tourist boom, we like travellers when travel distance increases. We believe the XRL prominent HK-based operators, including Chow Tai Fook, Luk would primarily attract those residing within a six-hour Fook and Chow Sang Sang in jewelleries & watches; Sa Sa in travelling radius by high-speed train due to time and cost cosmetics; as well as Lifestyle’s department stores that mainly savings. Residents in Wuhan and Xiamen are cases in point. On focus on luxuries & cosmetics. Most of these retailers are the other hand, travelling to Hong Kong by air remains more trading at an undemanding valuation, offering about 15-30%+ time and cost efficient for those residing in Shanghai and upside on a 12-month horizon. Beijing. Wharf REIC and Hysan Development emerge as prime Additional 3 million tourists per annum. We estimate that XRL beneficiaries of the retail market boom. Retail plays, especially would bring in an additional three million Mainland tourists per those selling expensive luxury items and cosmetics, should annum from 2019, made up of both day-trippers and continue to see better retail sales growth. This should translate overnight visitors. This represents c.5% of total tourist arrivals. into higher turnover rent, immediately followed by stronger retail reversionary growth in the years ahead. These factors Appeal to business travellers and middle income class. A mega- should drive the earnings growth for major retail landlords sized office project is planned to be built above the West including Wharf REIC and Hysan Development. Wharf REIC is Kowloon Terminus of the XRL. Coupled with easy accessibility trading at 26% discount to our assessed current net asset to Central, the XRL should hold strong appeal to business value (NAV) while Hysan Development is trading 44% below travellers from China. Besides, the high-speed train should our estimated current NAV. Despite these shares’ become the preferred mode of transportation among frequent outperformance year-to-date (YTD), there is scope for further individual travellers, mainly the middle income class and leisure share price appreciation in the year ahead with retail sector travellers, commuting between Mainland China and Hong expected to go from strength to strength. Kong. Langham Hospitality Investments, Regal REIT, and Far East Hong Kong-Zhuhai-Macau Bridge to be preferred transport Consortium to tap growing demand for hotel accommodation. mode between New Territories and Macau/Zhuhai. The HZMB Revenue per available room (RevPAR) of Hong Kong hotels is expected to come onstream in the second half of 2018, should remain on an upward trajectory in the foreseeable greatly improving the connectivity between Hong Kong and future. Far East Consortium, Langham Hospitality Investments, the western Pearl River Delta. In particular, the HZMB will be and Regal REIT should benefit from this favourable sector trend the preferred transportation mode to commute between New in our view. Overall, Langham Hospitality Investments and Territories and Macau/Zhuhai. Regal REIT are each currently offering distribution yields of >6% for FY18-19. These stocks are BUYs with respective TPs of Enormous long-term potential to be unlocked. Between these HK$3.68 and HK$2.61. Far East Consortium is trading >60% two infrastructure projects, the XRL should give a stronger below our appraised current NAV. In addition to a recovery in boost to Hong Kong’s inbound tourism initially. But long-term, hotel earnings in Hong Kong, its overseas business expansion the potential of the HZMB should not be overlooked especially will also play a crucial role in dictating its share price when the Tuen Mun-Chek Lap Kok Link and SKYCITY becomes performance. Maintain BUY with TP of HK$5.55 operational. ASIAN INSIGHTS Page 3 Asian Insights SparX Hong Kong Property & Retail Sector New infrastructure to link Hong Kong and China Map of China’s High-Speed Rail network The Express Rail Link to be commissioned soon.